Silver ETFs: How to Find the Best Investments for 2019

A silver ETF, or an exchange-traded fund that tracks a silver index of bullion or equities and trades on a stock exchange, is one of the smartest tools in the hands of an investor seeking exposure to the precious metal. Silver often conjures images of lustrous jewelry or coins, but you may be surprised to know that silver is an indispensable component for several key industries and products, especially electronic devices. 

The idea of investing in silver ETFs may sound more complex than simpler options like buying silver coins, silver bars with 99.9% purity known as bullion, futures contracts, or stocks of large silver companies like Wheaton Precious Metals Corp. (NYSE: WPM). But we'll show you how a silver ETF is not only a safer, more cost-effective, and tax-efficient alternative to owning the commodity outright, but it also helps diversify your portfolio.

Owning a silver ETF is one of the smartest ways to gain exposure to silver. Image source: Getty Images.

What is silver?

Silver is primarily a by-product of gold, copper, zinc, and lead mining, which means it is found in combination of one or more of these primary and base metals under the earth's crust and has to be separated. That also explains why companies mining silver often double up as producers of other metals, too. Consider Mexico-based Fresnillo, for example. Fresnillo is not only the world's largest silver producing company, but also Mexico's largest gold producer. Likewise, Goldcorp, one of the world's largest gold-mining companies, was also the world's fourth-largest silver producer in the world in 2017. 

Silver was first mined nearly 5,000 years ago, but it was only later in the 19th century when production exploded as technological innovation led to new silver discoveries. Globally, 852.1 million ounces of silver were produced in 2017. Mexico and Peru were the world's largest silver producing countries, together accounting for nearly 40.4% of global silver production in 2017, followed by China, which contributed 13% to global silver production in the year. 

How volatile are silver prices?

Given the dynamics of demand and supply and macro factors that can influence the price of silver, silver prices are volatile and have fluctuated dramatically over the years and decades. For example, data from macrotrends shows that silver prices hit a high of $49.45 per ounce in 1980. In less than five years, prices were down to low single-digits and hovered at those levels until picking up slack in 2006. Again in 2011, silver prices shot up to nearly $50 per ounce. Right now, silver is commanding a price of around $16 per ounce. 

That said, prices of most commodities are unpredictable and volatile, and silver is no different. Yet, given that silver is a rare commodity but has extensive use in several industries, owning silver-related investments is something every investor should consider.

Right now, investors may look at the gold-to-silver ratio, which simply shows how many silver ounces would equal one ounce of gold based on spot prices. Historically, an above-average gold-to-silver ratio is considered to be a positive indicator for silver prices. The ratio is currently hovering at levels not seen in nearly two decades, making silver a smart investment right now. The best and easiest possible way to get a piece of the action is to go for a silver ETF. 

What is an ETF and a silver ETF?

An exchange-traded fund is similar to a mutual fund -- it allows you to invest in a basket of stocks, bonds, or underlying assets such as physical commodities with a single investment. So, with each ETF share, you own a piece of the underlying asset. A silver ETF, as the name suggests, is an ETF that tracks silver prices. So when you buy a silver ETF share, you effectively get to own a notional amount of silver.

ETFs track an index, which means their holdings replicate the holdings of the index. For example, the iShares MSCI Global Silver Miners ETF tracks the MSCI ACWI Select Silver Miners Investable Market Index, which measures the performance of stocks of companies primarily engaged in the mining, exploration, and production of silver in developed as well as emerging markets. The ETF, therefore, owns the same stocks as the index. 

Because ETFs are listed on a major stock exchange, one can buy and sell units of an ETF during market hours just like stocks. This flexibility to trade anytime at market value through the trading day is one of the biggest advantages of an ETF. ETFs also usually have lower costs and are more tax efficient than actively managed mutual funds, which eventually translates into bigger gains in the hands of an investor.

How do you pick a silver ETF?

With only a handful of silver ETFs listed in the U.S., your choices are narrowed dramatically once you've decided what kind of ETF you want to buy. That also means having to compare fewer ETFs based on the expense ratio, which makes the task of selecting a silver ETF in which to invest even easier.

Expense ratio is a key criteria for investors to use in selecting ETFs. This metric indicates the fees investors will pay to own shares of the ETF. An expense ratio of 0.5% means the fund will deduct 0.5%, or $5, for every $1,000 you invest. 

You'd be surprised to know that just one of the 12 listed silver ETFs actually accounts for the bulk of the industry's assets under management (AUM). AUM is the total market value of all assets held by funds in their portfolios at any given point, and it is indicative of size.

What are the largest silver ETFs?

Here are the biggest silver ETFs by AUM:

Data source: ETFdb.com. All data as of Feb. 8, 2019.

Which among these are the best ETFs to buy right now? Before we dive deeper into specific ETFs, you need to develop your investment thesis, which explains why you're investing in silver in the first place. Having this thesis in place will guide your silver investment's future and help you hold onto your stock even if its value takes a dive.

Why invest in silver?

Like gold, silver is considered a store of value: It's an asset that can be stored for future use and even traded for another asset. For example, you can buy silver jewelry, wear it, and then exchange or sell it later in return for another piece of silver or money. Your silver jewelry doesn't depreciate, although its tradable value will depend on silver prices, which can be volatile, as precious metals investors know.

In the financial world, gold and silver are typically considered a hedge against uncertainty and inflation. So during economic downturns or a geopolitical turmoil, it's not uncommon to see investors flock to precious metals, driving up their prices. While gold has a greater appeal as jewelry and as a safe-haven asset, you can invest in silver to take advantage of its industrial demand fueled by global economic growth.

What are the uses of silver?

Silver has a wide variety of uses across industries as it's a malleable element as well as a good conductor of electricity. Key silver applications include:

1. Electronics: All kinds of devices such as smartphones, television, computer, keyboards, and components such as wires, circuit boards, and switches.
2. Solar panels: Photovoltaic cells and systems.
3. Medicine: Bandages, ointments, coatings in surgical equipment.
4. Automotive: Engines, battery packs, cables.
5. Other uses: Photography, water purification, brazing and soldering, ball bearings, production of ethylene oxide, and chemical processes.

That should give you a fair idea about how significant silver is as an industrial metal, which also explains why global demand for the metal has remained relatively steady and strong over the years. 

Notably, while there are clear demand catalysts for silver, supply remains constrained primarily due to fluctuations and unanticipated disruptions in output from key silver mines in the world. For instance, in 2017, total global demand for physical silver was roughly $1.02 billion ounces compared with a total mine and scrap supply of $991.6 million ounces, according to data from the Silver Institute. This demand-supply gap could widen as electric vehicles are adopted and renewable energy sources like solar gather steam steam, both of which will further drive demand for silver.

Why invest in a silver ETF?

Owning physical silver or owning silver stocks come with their own disadvantages. These weaknesses are mitigated when you instead own part of a silver ETF.

In the case of bullion, you not only have to pay commissions on purchases and sales, but also bear storage costs and risks. You'd also need to cough up a greater sum of money to own a chunk of silver as compared to shares of an ETF.

Silver stocks, on the other hand, are a great choice provided you have the drive and time to deep-dive into companies to find the ones worthy of your money.

Stock-picking is a learning process that requires due diligence to ensure you buy the right stocks. Moreover, within the silver industry, you should know the difference in the business models of silver-mining and silver-streaming companies. 

Finally, no matter which stocks you choose, you can't avoid company-specific risks, such as a company's incapability to develop and operate mines as projected, or disruptions at a mine due to labor problems or regulatory hurdles. 

An ETF offers you the middle ground, enabling you to easily gain exposure to silver for low costs with ample liquidity, or the ability to sell to raise cash. Owning an ETF, therefore, is your best bet to invest in silver unless you desire physical possession of the metal.

What are the types of silver ETFs?

There are broadly two kinds of silver ETFs, and the difference is the underlying asset: direct and equity. 

Direct silver ETF: A direct silver ETF owns bullion, usually held by a custodian on its behalf, and issues shares against it. Such ETFs closely track the day-to-day movement in silver prices, so investing in them is akin to buying physical silver but for a lower cost. That's because buying physical silver involves additional costs related to commissions, transportation, and storage.

While an ETF holding bullion also has to bear these costs, the expenses are divided among all the shareholders, which effectively lowers the cost of investment for an individual investor. To be clear, a direct ETF does not entitle you to get delivery of physical silver as the metal such ETFs hold merely backs its shares. You can easily buy and sell ETF units through your brokerage account like stocks. 

Equity silver ETF: An equity silver ETF owns silver equities, or simply put, it buys stocks of silver companies and tracks an equity index. Such an ETF is the best option to capitalize on silver through the securities market. The biggest advantage of silver equity ETFs over silver stocks is diversification, which minimizes overall risk.

As an investor, chances are you'd add one or two, or only a handful at best, of silver stocks to your portfolio, which puts your money at greater risk -- especially if any company you own stock in were to encounter growth hurdles. With an ETF share, you can effectively own several silver stocks with a single investment, and they can be as diversified as you could imagine, based on market capitalization or size, business model or geography. The downside is that silver equity ETFs can carry additional risks, such as geographic risks and currency risk if the fund holds shares in international companies.

Which silver ETF you opt for depends on your personal risk tolerance. While the performance of a direct silver ETF depends almost entirely on silver prices, that of equity ETFs depends more on the operational and financial standing, as well as growth prospects, of individual mining companies that are part of the ETF. For example, if an ETF holds meaningful stake in a silver mining company that gets stuck in a rut, its returns could be severely affected even in an environment of strong silver prices. 

Understanding the pros and cons of silver ETFs should help you decide where to invest. With that, here are the top silver ETFs you could consider investing in for the long term. 

iShares MSCI Global Silver Miners ETF

The iShares MSCI Global Silver Miners ETF is among the handful of ETFs that invests in silver stocks. This ETF tracks the MSCI ACWI Select Silver Miners Investable Market Index, which consists of stocks of global silver-mining companies.

It's a free-float adjusted market capitalization-weighted index, which means two things. First, the market capitalization is calculated using float, or the numbers of shares held by the public, rather than outstanding shares. Second, the weight of each company in the index is proportional to its market capitalization, so the larger companies make up a bigger portion of the index. 

As of Feb. 7, 2019, the iShares MSCI Global Silver Miners ETF owned shares in 33 silver-mining companies aside from cash and derivatives positions. Geographically, nearly 62% of the ETF's total market value is represented by stocks of silver companies domiciled in Canada. The U.S., U.K., Peru, Mexico, and Japan are the other regions that headquarter companies in the ETF's portfolio. In other words, this ETF provides you access to a well-diversified portfolio of silver companies. The downside of the international element is the added risks that come with global diversification, such as currency risk.

In terms of individual stock holdings, I like this ETF for its large exposure to one particular company: Wheaton Precious Metals. As of Feb. 7, the stock made up 25.53% of the ETF's total portfolio value. Wheaton Precious Metals' business model gives it a solid edge over silver-mining companies. As a silver streaming and royalty company, Wheaton doesn't extract metals like a typical miner would. Instead of owning, developing, and operating mines, Wheaton buys precious metals from third-party miners at discounted prices in return for financing them upfront to support their capital and growth requirements.

To give you an example, one of Wheaton's long-standing silver agreements is with Goldcorp on its Penasquito mine in Mexico. Struck in 2007, the agreement entitles Wheaton to buy 25% of the silver produced from Penasquito for the entire life of the mine at a price of $3.90 per ounce of silver subject to inflationary adjustment or the prevailing spot silver price, whatever is lower. Wheaton paid $485 million in upfront cash to Goldcorp at the time of the agreement. Now compare that purchase price with spot silver price of around $14.50, and you can immediately understand why streaming is a lucrative business -- and why Wheaton Precious Metals is one of the top precious metal stocks to own.  

Of course, that's not to say that all of the stocks in the iShares MSCI Global Silver Miners ETF's portfolio are on strong footing. Take Tahoe Resources (NYSE: TAHO), which made up 4.26% of the ETF's portfolio as of Feb. 7. Tahoe shares lost nearly half of their value in a year since the company's operating license in Guatemala was suspended in 2017. The beleaguered miner finally found a lifeline this past November when Pan American Silver (NASDAQ: PAAS) -- also a holding in the iShares ETF -- decided to acquire it. 

The upshot is that while an equity silver ETF exposes you to company-specific risks like owning individual stocks, the impact of any one company's adversity won't hit your portfolio as severely because the ETF owns a whole basket of stocks. For every weakness, there's a pocket of strength to offset it.  

Global X Silver Miners ETF

If you're interested in a silver equity ETF with a more balanced portfolio, look at the Global X Silver Miners ETF, but be ready to shell out more money for it. The biggest drawback of the Global X Silver Miners ETF is its high cost: An expense ratio of 0.65% means you'll pay $6.50 for every $1,000 that you invest in the ETF. Not too shabby, though, for what you get.

Like the iShares MSCI Global Silver Miners ETF, the Global X Silver Miners ETF also invests in stocks of silver companies across the globe. It tracks the Solactive Global Silver Miners Total Return Index, which is also a free-float market-capitalization weighted index, made up of 20 to 40 stocks at any given moment.

This ETF is better balanced than the iShares MSCI Global Silver Miners ETF because while the latter is heavily exposed to Wheaton Precious Metals, the same stock comprised only 12.61% of this ETF's net assets despite being its top holding. The next three stocks -- Polymetal International, Korea Zinc Co, and Pan American Silver -- combined made up roughly 36.45% of the portfolio as of Feb. 8. That means the Global X Silver Miners ETF is geographically more balanced: Companies based in Canada comprised roughly 47%; Russia, South Korea, and the U.S. around 13% each; Mexico roughly 8.3%; and Peru 5% of its portfolio. 

iShares Silver Trust and Aberdeen Standard Physical Silver Shares ETF 

The iShares Silver Trust, a direct silver bullion ETF, is a top choice among precious metal investors for its liquidity: It is the largest silver ETF with nearly $4.87 billion in AUM as of Feb. 8, 2019. That's more than the combined AUM of the 11 other major U.S. silver ETFs!

The iShares Silver Trust was the first silver ETF to be listed, launched in April 2006. At that time, silver was such an illiquid market that an innovative product that allowed investors to invest in silver in a convenient, cost-effective way without the hassles of buying bullion garnered a lot of attention. While several other silver ETFs have hit the market since, the iShares Silver Trust remains a leader, largely for its first-mover advantage.

Shares of the Trust are backed by physical silver held by a custodian on its behalf. As of Feb. 8, the ETF held roughly 309 million ounces of silver. However, the Trust sells silver periodically to meet expenses, which is why the amount of silver represented by each share has declined with time. So, for example, each iShares Silver ETF share is currently equivalent to roughly 0.938 silver ounces. 

This ETF aims to track the market price of silver (it considers the London Bullion Market Association silver price as the benchmark) on a day-to-day basis. However, the ETF shares usually trade for a value below the spot silver price. That's because the ETF shares reflect a price that is equivalent to the market price of total silver owned by the trust at any given point less its expenses and liabilities.

From that standpoint, the Aberdeen Standard Physical Silver Shares ETF scores a brownie point as its shares currently represent 0.972 ounces of silver. The Aberdeen Silver ETF also has an expense ratio of only 0.30% compared to the iShares Silver Trust's 0.50% ratio, which translates into a lower purchase cost for shareholders. 

How to start investing in silver ETFs

iShares Silver Trust and Aberdeen Standard Physical Silver Shares ETF both offer direct exposure to silver as their portfolios comprise 100% physical silver. 

Whether you go for a bullion-based or an equity ETF, the fact that you can diversify your portfolio with precious metals without having to do the hard work of researching stocks or worrying abut storing your metal is what makes silver ETFs attractive investment tools.

What does 2019 look like for silver?

After a tough 2018, silver prices have bounced off lows and are rallying higher so far this year, thanks largely to the volatility in the stock markets that diverts investor attention to alternative investments such as precious metals.

Most industry experts expect 2019 to be a strong year for silver prices -- a projection that just got the backing of the Silver Institute. In its silver market trends 2019 report released in early February, the Silver Institute projects strong global demand for silver in 2019, both in the form of jewelry as well as for industrial purposes, even as silver mine production is estimated to decline 2%. The Institute foresees the price of silver averaging $16.75 per ounce in 2019, representing 7% upside from its 2018 average price.

With most factors pointing at a strong year for silver, investors might want to consider adding silver investments such as silver ETFs to their portfolio. A silver ETF is one of the easiest and most convenient ways for investors interested in betting on the silver industry to get in the game.